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Unfortunate Tax Change in 2014

In September of 2014, the IRS issued a notice that went into effect because of the Affordable Care Act. This notice affects all self-employed persons who deduct their health care premiums.

The new regulations state that highly compensated individuals who also own at least 10% of the company cannot deduct their health insurance premium unless the health insurance is offered to the entire company.

In listening to and reading analysis, many tax preparers are recommending that shareholders who are adversely affected by this treat their health care premiums as a dividend.

However, this does notice does not only affect shareholders; it can also affect employees. In the cases where a small company would pay for an employee’s insurance premiums directly, it appears that those employees may also have to pay taxes on that money.

Take the case of an employee whose employer was paying $500 per month ($6,000/year) directly to the insurance company. Now the employee will have to pay all state and federal taxes on that $6,000. This is going to make a lot of employees unhappy. Unfortunately, the notice came very late in 2014 so it was hard to make a course correction for employees. For 2015, employers should just make the $500 per month part of payroll.

This new law is very complicated and has many parts. It is very important that if this affects you in any way, you work with a professional tax preparer. We are always happy to make recommendations.

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